TY - JOUR T1 - Hedge Fund Collateralized Fund Obligations JF - The Journal of Alternative Investments SP - 45 LP - 62 DO - 10.3905/jai.2002.319054 VL - 5 IS - 2 AU - Sivan MahaDevan AU - David Schwartz Y1 - 2002/09/30 UR - https://pm-research.com/content/5/2/45.abstract N2 - Credit structuring technology has been very successfully employed to create the market for collateralized debt obligations (CDO). CDOs redistribute credit risk to meet investor demands for a wide spectrum of rated securities with scheduled interest and principal payments, securitized by diversified pools of debt instruments. The equity components of CDOs are leveraged investments that offer unique risk and return benefits and have created a market for alternative investments linked to the credit markets. Among the more recent innovations in structuring technology is the advent of collateralized fund obligations (CFO). In these structures, investors gain exposure to a diverse collection of funds through a fund of funds manager. The capital structure of a collateralized fund obligation is similar to traditional CDOs, meaning that investors are offered a spectrum of rated debt securities and equity interest. Although any managed fund can be the source of collateral, the target collateral in these structures tends to be hedge funds, along with funds that finance the needs of growing companies, such as private equity and mezzanine funds. Investors benefit from a risk-tranching approach to investing in a diversified pool of funds that are often difficult to access separately. Collateralized fund obligations tend to be structured as arbitrage market value CDOs, meaning that the fund of funds manager focuses efforts on actively managing the fund to maximize total return while restraining price volatility within the guidelines of the structure. In this report, we focus our research efforts on understanding the structure and rating methodology of hedge fund CFOs. We also discuss the motivation for investing in a diversified pool of hedge funds, the collateral type we view as being among the most popular for the burgeoning market of CFOs. Where applicable, we compare hedge fund and private equity CFO structures as well. ER -